Ratio measuring how efficiently a business collects credit sales relative to its average receivables balance.
Accounts receivable turnover is the ratio that measures how many times a business collects its average receivables balance during a period. It is a common way to evaluate credit collection efficiency and receivables quality.
Slow receivable turnover can point to weak collections, liberal credit terms, or deteriorating customer quality. Faster turnover usually supports liquidity, but it must still be judged against the company’s sales model and credit policy.
The common formula is:
\[ \text{Accounts Receivable Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \]
Average accounts receivable is often based on beginning and ending balances for the period. The ratio is most useful when compared across periods, against peers, or alongside aging reports and allowance trends.
Many analysts also translate turnover into an approximate collection period:
\[ \text{Average Collection Period} \approx \frac{365}{\text{A/R Turnover}} \]
If beginning accounts receivable are 120,000, ending accounts receivable are 180,000, and net credit sales are 900,000, the calculation looks like this:
| Input | Amount | |
|---|---|---|
| Beginning accounts receivable | 120,000 | |
| Ending accounts receivable | 180,000 | |
| Average accounts receivable | 150,000 | |
| Net credit sales | 900,000 | |
| A/R turnover | 6.0x | |
| Approximate collection period | 60.8 days |
Higher turnover is not automatically better. Extremely high turnover may reflect overly strict credit terms that suppress sales. The ratio is also less meaningful if cash sales dominate and credit sales are not separated cleanly. It should be read together with receivables aging and the allowance for doubtful accounts, not as a stand-alone verdict on credit quality.